By: Staff Writer
July 25, Colombo (LNW): In a decisive move to align with global tax trends and expand its fiscal net, Sri Lanka will begin imposing an 18% Value Added Tax (VAT) on non-resident digital service providers from October 1, 2025. The Inland Revenue Department (IRD), under the Value Added Tax (Amendment) Act No. 04 of 2025, has mandated that foreign entities supplying digital services to Sri Lankan consumers must register, collect, and remit VAT to local authorities.
This landmark decision represents a strategic effort to modernize Sri Lanka’s tax base by targeting the fast-growing digital economy. The regulation applies specifically to business-to-consumer (B2C) transactions and covers a broad spectrum of digital services including cloud computing, software-as-a-service (SaaS), e-commerce platforms, streaming services, online marketing, gaming, social media, fintech, blockchain, and NFTs.
Non-resident providers must register for VAT if their turnover from Sri Lankan consumers exceeds Rs. 60 million annually or Rs. 15 million in any three-month period. The relatively low threshold is likely to bring a considerable number of foreign digital operators into the Sri Lankan tax net, including mid-sized players and niche service providers.
The financial burden of the new VAT regime is expected to be passed on to consumers, effectively raising the cost of digital services for Sri Lankans. This could dampen digital consumption or encourage unofficial workarounds among cost-sensitive users. Service providers, meanwhile, will have to overhaul their billing and accounting systems to comply with Sri Lanka’s VAT requirements, including quarterly electronic tax filings and five-year record retention.
While the system grants the IRD power to impose penalties and potentially restrict or blacklist non-compliant providers, enforcing compliance against entities without a physical presence in Sri Lanka may prove difficult. The success of the regime largely hinges on voluntary compliance by overseas platforms, which must obtain a local Taxpayer Identification Number (TIN) and register via an online portal.
Moreover, collecting taxes from tech giants and smaller digital firms alike introduces complexities, especially where foreign currency exchange and cross-border transactions are involved. The enforcement challenge is compounded by the lack of clear dispute resolution mechanisms for disagreements involving non-resident providers.
Despite these hurdles, Sri Lanka’s move is in line with global efforts by countries such as India, Australia, and members of the EU, which have implemented similar digital service tax regimes to capture revenue from tech-driven global commerce.
As digital services become increasingly integrated into everyday life, this VAT expansion marks a significant step in ensuring that international service providers contribute their fair share to the domestic tax system. However, effective administration and stakeholder cooperation will be key to its long-term success.
